Ivanhoe Mines Ltd. (IVN.T) Tuesday said it was terminating a covenant that governs Rio Tinto PLC's (RTP) investment in Ivanhoe, a step that will allow the Canadian miner to issue more than 5% of its shares to strategic investors.

Ivanhoe's board of directors said it gave Rio Tinto 60-day notice that it was exercising its right to cancel the strategic purchaser covenant in order to give the board more "flexibility" to consider opportunities to maximize value for Ivanhoe Mines shareholders.

The termination of the covenant will allow Ivanhoe to issue "common shares to one or more third-party strategic investors, which could include major mining companies," the company said.

Andrew Harding, chief executive of Rio Tinto's copper division, resigned from the Ivanhoe's board prior to the meeting which led to the termination of the covenant.

Ivanhoe's shares jumped more than 17% after the announcement as analysts began to speculate who might be willing to take a sizeable stake in the miner, the majority owner of the world's largest untapped copper and gold deposit in Mongolia. Ivanhoe has a 66% stake in the Oyu Tolgoi project while the Mongolian government owns the remaining 34%.

"Ivanhoe is in play," said equity analyst Raymond Goldie of Salman Partners. "If there were to be a take-out, we consider...C$19.85/share to be a likely figure at which the company could be taken over."

Rio Tinto said last week in a filing that its major shareholder, Aluminum Corp. of China, also known as Chinalco, "has indicated an interest" in acquiring a minority equity stake in Ivanhoe or a minority interest in the Oyu Tolgoi project.

A Chinalco executive, who declined to be named, told Dow Jones Newswires last week that the company was committed to exploring investment in overseas projects and would like to deepen its cooperation with Rio Tinto, in which it holds a roughly 9% stake.

A Mongolian government official said last week the government hadn't been consulted yet on any plans for a stake sale in the mine or Ivanhoe.

Ivanhoe and the Mongolian government have the first right of refusal if either party wants to sell a stake in the mine.

Rio Tinto, which holds a 29.6% stake in the company, could also increase its stake in Ivanhoe by exercising its right of first offer. Should Rio Tinto exercise that right and increase its Ivanhoe stake beyond 46.65%, then a standstill agreement with Ivanhoe that limits how much Rio can buy in Ivanhoe would become void.

Under the standstill agreement, Rio Tinto has the right to increase its Ivanhoe stake up to 46.65% by exercising warrants, converting a loan and buying shares in the open market until October 2011.

David Huberman, lead independent director of Ivanhoe, said the Canadian firm was dedicated to working with Rio Tinto to develop the Oyu Tolgoi project.

At 1542 GMT, Rio Tinto's shares were up 32.50 pence or 1% at 3135 pence. At 1522 GMT, Ivanhoe's shares were up C$1.97 at C$16.90 in Toronto.

   Company Website: http://www.riotinto.com 
http://www.ivanhoemines.com

-By Alex MacDonald, Dow Jones Newswires; 44 20 7842 9328; alex.macdonald@dowjones.com
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